Citing Economic Headwinds, CBN Holds Interest Rate At 14%

Dickson Agbo Posted: 1 year ago

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The Central Bank of Nigeria (CBN) yesterday retained the nation’s monetary interest rate at 14 per cent, citing headwinds confronting the domestic economy on one hand and the uncertainties in the global environment on the other as reasons for its decision.

The monetary policy committee (MPC) decided by a vote of 6 to 2 to retain the MPR at 14.0 per cent alongside all other policy parameters.

The bank also retained its cash reserve ratio (CRR) at 22.5 percent, liquidity ratio at 30.00 per cent and the asymmetric corridor at +200 and -500 basis points around the MPR.

“In consideration of the headwinds confronting the domestic economy and the uncertainties in the global environment, the Committee decided by a vote of 6 to 2 to retain the Monetary Policy Rate (MPR) at 14.0 per cent alongside all other policy parameters”, the CBN governor, Mr. Godwin Emefiele, announced in a communiqué at the end of the bank’s MPC meeting yesterday in Abuja.

Nigeria is operating a-year-old regime of high official interest rate at 14 per cent (since July 2016), with double digit inflation rate of 16.1 per cent.

The monetary authority has consistently rebuked advice from some international organisations like the IMF to further tighten the interest rate to attract foreign investments.

Many, including the Minister of Finance, Mrs Kemi Adeosun, had asked the MPC to lower the interest rate in order to enable government access more loans domestically without expanding its debt servicing costs.

The MPC said it acknowledged that easing at this point would signal the committee’s sensitivity to growth and employment concerns by encouraging the flow of credit to the real economy, promote policy consistency and credibility of its decisions and reduce the cost of debt service, which is crowding out government expenditure, but insists that it is not time yet, considering the current inflation rate.

The CBN governor noted that easing at this time “would show in terms of upstaging the modest stability achieved in the foreign exchange market, the possible exit of foreign portfolio investors as well as a resurgence of inflation, following the intensified implementation of the 2017 budget in the course of the year”.

“The Committee also reasoned that easing would further pull the real interest rate down into negative territory”, he added.

While stating that the committee is mindful of the high cost of capital and its implications on the still ailing economy, which arguably necessitates an accommodating monetary policy stance, Emefiele agreed on the need to support growth without jeopardising price stability or upsetting other recovering macroeconomic indicators, particularly the relative stability in the foreign exchange market.

The committee expressed concern about the slow implementation of the 2017 budget and called on the federal government to ensure timely implementation, especially, of the capital portion in order to realize the objectives of the Economic Recovery and Growth Plan.

The Committee also expressed satisfaction with the gradual but consistent decline in inflationary pressures in the domestic economy, noting its substantial base effect, continuous improvements in the naira exchange rate across all segments of the foreign exchange market, and considerable signs of improved investments inflows.

The MPC welcomed the proposal by government to issue sovereign-backed promissory notes of about N3.4 trillion for the settlement of accumulated local debt and contractors arrears.

The MPC applauded the move by the federal government to engage the services of asset-tracing experts to investigate the tax payment status of 150 firms and individuals in an effort to close some of the loopholes in tax collection, towards improving government revenue.

Data from the National Bureau of Statistics showed that the contraction in the economy moderated to 0.52% during the first quarter of 2017 from 1.3% during the third quarter of 2016.

The date shows strong signs of recovery. The purchasing managers index (PMI) for manufacturing and non-manufacturing activities stood at 52.9% and 54.2 index point in May and June 2017 respectively; from 52.7 and 52.5 index points in May 2017, indicating an expansion for the third consecutive month.

Similarly, the CBN expressed concerned over increasing fiscal deficit estimated at N2.51 trillion in the first half of 2017. The CBN governor applauded the proposal by federal government to issue sovereign-backed promissory notes of about N3.4 trillion for the settlement of accumulated local debt and contractors arrears.

Meanwhile, following decision of the Monetary Policy Committee of the CBN to continue to hold benchmark lending rate at 14 per cent, analysts have said they do not expect a cut in rates till the second quarter of 2018.

Analysts who spoke with LEADERSHIP said the decision to hold the rate at a high of 14 per cent is in line with the trend by central bankers across the globe who are voting to raise interest rate.

The United States Federal Reserve had hiked rates from a band of 0.75 and 1 per cent to 1 and 1.25 per cent at its last meeting this month despite a declining inflation.

Head of Research at Afrinvest West Africa, Robert Olatunde said, “While a cut in rates is inevitable, it will happen eventually but not sooner like people are expecting. It may not happen in 2017 but in the second half of 2018”.

On his part, Head of Research at Sterling Capital, Sewa Wusu, noted that cutting rates now would counter the gains the BN has been able to achieve in respect to stability in the foreign exchange market where rates have been able to converge.

He stated that a cut in rate now would make the goal of wooing foreign investors into the economy to drive forex liquidity and spur growth in the economy would become more challenging.

He however raised concerns on the outlook of external factors on the economy. He said, “What is of concern right now is the external outlook, the oil price. It is like Nigeria is now being capped by OPEC to cut production and if they do that we are going to lose revenue because they capped our production to 1.8 million barrels per day, this will be a pressure for us. Also if the oil price tumbles, our foreign exchange earning capacity will weaken”.